In a one-two punch this week, the Federal Communications Commission (FCC) rejected LTD’s appeal of the earlier decision declaring it to be in default for its Rural Digital Opportunity Fund (RDOF) winning bids and proposed to fine LTD over $21 million for its defaults. The two decisions provide a cautionary tale for states as they begin their competitive grant processes in 2024 for National Telecommunications and Information Administration’s $40+ billion Broadband Equity Access and Deployment (BEAD) program.

The FCC has been much criticized for the outcome of the RDOF auction, even though other RDOF awardees are busy at work, building networks and offering high-speed, reliable broadband service to customers ahead of schedule. Some point to LTD’s default as evidence that the auction was a failure. To the contrary, the FCC’s process worked exactly as intended.

FCC auction winners are not automatically awarded funding. When the RDOF auction concluded, many seemed to think that was the end of the process. Far from it.

The FCC’s short-form application process essentially determines who is eligible to bid in the auction; it’s not an in-depth review. As explained by the FCC in its recent decision, the short-form review process is a general assessment of whether a short-form applicant could theoretically provide the required service, at some level, in each state where it wished to bid. Winning bidders in an FCC auction are not awarded funding—they merely have earned the right to apply for funding through the long-form application. In the long-form application, a winning bidder must demonstrate through a detailed financial and technical plan that it could provide the required level of service in the specific areas where it was a winning bidder.

Why did the FCC declare LTD in Default?

In the case of LTD, the FCC staff found, after extensive review of LTD’s long-form application, that LTD was not reasonably capable of complying with the FCC’s requirements. As the full FCC highlighted in its decision proposing to fine LTD $21 million, among other things:

• LTD did not show that it had available funds to meet all project costs that would be incurred in its first two years.
• LTD had failed to line up any financing when it submitted its application, and only presented a term sheet for a loan and equity fundraising round 17 months later.
• LTD did not provide evidence that it could cover the necessary debt service payments over the life of its loans.
• LTD presented unrealistic deployment cost assumptions, raising concerns that the overall determination of deployment costs was too low. Likewise, it presented unrealistic revenue assumptions.
• LTD failed to provide specific and localized project designs; instead, it applied an unrealistic one-size-fits-all approach for the vast areas where it would be required to deploy last-mile fiber to every serviceable location and the supporting middle-mile and core infrastructures.
• LTD’s technical submissions reflected a lack of understanding of how significantly its business would need to scale up to achieve equipment purchases, hiring, construction, deployment, maintenance, operations, and customer service for the sizeable network that would be required to meet its RDOF obligations.

The post mortem

The FCC’s effort to encourage broad participation in the auction backfired. One failure of program design for the RDOF auction was the omission of a procedure in the short-form stage to pre-qualify bidders to bid up to a defined dollar amount or defined number of locations. When consumers shop for a home, they can pre-qualify with a mortgage broker for a loan up to a defined dollar amount, based on their income and other assets. LTD’s—and ultimately, the FCC’s—downfall was the lack of any mechanism to prevent bidders from bidding speculatively all over the country, without regard to their ability to perform.

LTD did not have its house in order when it filed its long-form application. Rather, the sequence of events shows that it bid speculatively, and it bid big—hoping it could line up financing later. According to one press report, LTD (now rebranded as GigFire) was still seeking equity financing more than seven months after the FCC declared it to be in default.

The process of declaring LTD to be in default took a long time. The RDOF winning bidders were announced in December 2020, and the technical and financial submissions for the long-form application were due in January 2021. As explained by the FCC, in March 2021, June 2021, September 2021, and multiple times in March 2022, FCC staff spoke with LTD about the financial and technical deficiencies that staff identified in LTD’s long form application. In August 2021 and again in November 2021, LTD submitted a revised technical description—curiously, a network design for states where LTD was not a winning bidder! According to the FCC: “repeated contacts with LTD through March 2022 did not elicit additional financial or technical filings. To conclude this process, staff sent a formal letter to LTD on May 26, 2022, extensively detailing the application’s deficiencies and providing LTD a final opportunity to demonstrate its qualifications for support.” In a final Hail Mary pass, on the day of its response to FCC staff was due, LTD submitted revised financial and technical attachments, including a term sheet for two financial agreements entered into that same day to obtain additional funding and a source for future loaned funds. The FCC staff issued the default decision in August 2022.

There was no FCC process to select a next-in-line bidder for the defaulted areas. Many bidders competed in the RDOF auction and would have welcomed the opportunity to file a long-form application for geographies where LTD and other winning bidders defaulted, at the price point where they dropped out of the bidding. That was not an option, however, under the FCC’s RDOF auction rules.

What lessons can be learned from this for BEAD?

In the coming year, many states will be commencing competitive grant processes to award their allotted BEAD funding. Right now, many interested stakeholders are pouring over the various draft Initial Proposals, comparing key features like scoring rubrics, whether there will be multiple grant rounds, and how the states plan to define project areas. Few seem to be paying attention to how states are going to vet the financial and technical bona fides of prospective applicants to ensure they can deliver what they are promising.

Many states, including Arkansas, Louisiana, and Virginia have indicated they will undertake a process to pre-qualify firms before allowing them to apply for BEAD grants. At that point in time, however, the state broadband office won’t necessarily know the full scope of BEAD ambitions for every prospective applicant.

There’s a critical difference between establishing basic operational capability and the financial/managerial capability to execute a large-scale infrastructure construction project in four years or less. States need to do more than just check the box that a firm’s been in operation for two years. Delayed reimbursement for completed work may protect the government’s funding, but it won’t help unserved communities if the awardee fails to perform.

Whether there are multiple competing applications for a given geography, with the one with the highest score selected, or only one applicant for a given area, it is critical that states conduct a rigorous process to ascertain whether prospective BEAD grantees have access to capital sufficient to complete the proposed project, and the managerial capability to execute. Will the states ask new entrants and multi-state firms to disclose whether they are applying for BEAD in other states, to ascertain the scope of their BEAD intentions? The LTD experience shows that it’s not wise to rely on applicant certifications; someone needs to dig into the details and assess the ability to perform.

The states only have one chance to get BEAD right—there is never going to be another infusion of federal funding for infrastructure investment of this magnitude again.

This article originally appeared on Medium; it is reprinted here with permission of the author.

Carol Mattey is a former senior official from the Federal Communications Commission, where she led teams working on initiatives to modernize the FCC’s $9 billion Universal Service Fund to support broadband. She currently is the principal of Mattey Consulting LLC, which provides strategic and public policy advisory services to broadband providers and other entities seeking funding for broadband. She is partnering with Irby Utilities to help achieve the vision of bringing sustainable, reliable internet to everyone in rural America.

The Benton Institute for Broadband & Society is a non-profit organization dedicated to ensuring that all people in the U.S. have access to competitive, High-Performance Broadband regardless of where they live or who they are. We believe communication policy - rooted in the values of access, equity, and diversity - has the power to deliver new opportunities and strengthen communities.

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